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The external environment (1) (Taxation of benefits (Benefits can be…
The external environment (1)
General factors to consider
(CREATE GRAND LISTS)
The underwriting cycle
Profitability in the various insurance classes tends to go in cycles, driven by market forces of supply and demand combined with actual claims experience and economic climate
When business is profitable, more insurers enter the market. Premium rates reduce as insurers compete for market share.
This leads to reduced profits or to losses, loss of business and reduced solvency, and the cycle goes into depression. The position may be accentuated by catastrophes or by the economic climate.
At the bottom of the cycle, insurers leave the market or reduce the involvement in the classes concerned. Eventually premium rates increase to cover the losses being incurred and in light of reduced competition
Compulsory insurance
Employers' liability
Motor third party liability
Regulatory influences to ensure a contract is suitable
Limits on charges levied by the provider, e.g. on unit trusts, or unit-linked contracts
Regulation of the sales process, e.g. on advice given and disclosure of information
Taxation of benefits
Benefits can be received free of tax
The excess of benefits over contributions can be taxed as income or as capital gains
Benefits can be taxed entirely as income
A portion of the benefit can be tax-free, with the balance being taxed.
Normal or special tax rates can be used where benefits are taxed
Tax on items other than benefits
Some arrangements may offer tax relief on contributions, normally couples with tax on the resulting benefits. Alternatively, contributions may be paid from taxed income, normally coupled with tax relief on the resulting benefits.
Income and gains may be taxed during the accumulation phase, normally coupled with no tax on the policyholder's gain.
Tax may be payable on inheritance. Insurance may be available to cover this tax liability.
Corporate governance
The high level framework within which a company's managerial decisions are made
A good corporate governance framework:
Encourages managers to act in the best interests of stakeholders, rather than in their own personal interests
incentivises managers in a way that achieves the first aim
utilises non-excutive directors.
Internationalism
Offset mortgage products from Australia
Critical illness plans from South Africa
Capital adequacy and solvency
Form part of banking and insurance regulation which sets a framework on how financial institutions measure their capital adequacy and solvency.
Financial institutions need to determine the minimum capital that they are required to hold. Capital adequacy is then measured as the excess of assets over the sum of liabilities and capital requirements. This might be expressed as a monetary amount but is more commonly stated as a percentage of liabilities plus capital requirements or a multiple of caputal requirements.
Increasingly, and largely driven by the availability of computing power, states are moving towards risk-based capital requirements such as the structures behind the European Solvency II regime. Earlier simple formulae-based approaches are becoming outdated.
The effect of age on lifestyle
Young people demand loans and mortgages, but few create a demand for savings.
Slightly older people pay off their loans and start to save. They may also need protection for dependants. Longer working lifetimes and increases in life expectancy will increase the need for savings, life assurance and the age to which it is required. There will be a move away from volatility towards security prior to retirement.
Older still (in retirement), and demand for savings diminishes, but is replaced with demand for post-retirement income plans and long-term care products. Children are less (or no longer dependent).
Accounting standards
The way that benefit schemes need to be reported in company accounts may influence the types of benefits that employers are prepared to provide for their employees
The presentation of financial instruments in the accounts of product providers also impacts on the range of products that is brought to market
For example, the different accounting requirements for setting the provisions for different types of insurance contract in different territories can influence the design of contracts.
Similarly whether a fund manager brings investments to market within an insurance wrapper in a subsidiary company, or through a collective investment scheme, might depend on the presentation and results shown in the company's accounts
Effects of an ageing population
Older people tend to spend less and save more. This leads to lower interest rates and deflationary pressures on the economy.
Some PAYG State pension systems are becoming unsustainable as the income received from the working population falls short of that needed to pay the retired population.
Increasing costs of healthcare systems lead to either higher levels of tax to be paid or reduced healthcare provision by the State.
The cost per capita of educating the population will tend to fall